This is an excerpt from Dollar Scholar, the Money newsletter where editor Julia Glum teaches you the modern money lessons you NEED to know. Don’t miss the next issue! Sign up to money.com/subscribe and join our community of over 160,000 scholars.
I’ve long joked that Money should just deposit my paycheck directly into the coffers at Madison Square Garden. I go to so many concerts there that it seems like a logical solution! Think about how much more efficient it would be if we skipped the middleman – me – and delivered my paycheck to the place where I’ll spend it anyway.
This is mostly a personal idea, but it’s not an outlandish idea. It’s actually similar to a movement happening right now called open banking, which involves linking various financial accounts for better money management.
Aside from my proposed Money-MSG partnership, I want to know more.
What is open banking?
Shaun Vanderkaap, vice president of strategy for payments startup Link Money, tells me that open banking is what happens when an account owner gives permission to third-party service providers, such as budgeting apps or investing platforms to access your financial data. The term “open banking,” therefore, refers to banks opening up their application programming interfaces, or APIs.
(Bear with me, I promise this is about to get interesting.)
It all has to do with the value – and use – of my banking data, says Dee Choubey, co-founder and CEO of fintech company MoneyLion, which has a mobile app and lending arm.
“Not that long ago, that data was locked,” he says. “Where you were spending with your credit card, where you were spending with your charge card, whether you’re withdrawing money from your ATM, all that data was… sitting inside a [bank] server somewhere.”
Because of this, the data was effectively blocked; the banks had a monopoly on it. But then people began to realize that if they gave permission to share their transactions, software applications could provide detailed information about their spending habits.
A good example of this was Mint (RIP): I connected it to my Bank of America accounts way back in 2016, and for years it tracked my spending by automatically sorting my transactions into categories like Clothing, Air Travel, and Cash & cash. ATM.
“Pretty much every time you connect your bank account [to something] it’s open banking,” says Vanderkaap.
Initially, these types of services were limited to screen scraping or basically getting a person’s login information, accessing the bank’s website and copying the HTML so that we could analyze the content. But “banks got angry,” Choubey adds, because third parties were taking valuable data without paying. Screen scraping wasn’t very secure either.
This has given rise to a debate: Who really owns someone’s banking details? Is it me (the customer) or the financial institution I am turning to?
The government got involved, and last fall, the Consumer Financial Protection Bureau formally proposed a rule that would prohibit financial institutions from “hoarding” my data.
It would require companies to hand over my data if authorized, prohibit receiving entities “from misusing or unfairly monetizing it,” and allow me to revoke access if I change my mind. The CFPB rule would also push open banking toward shared APIs and away from screen scraping.
With more advanced systems and control over my financial data, Choubey says I’m able to do so much more.
Forget boring bank websites: I can use nifty apps that let me view my account history in dark mode, for example, or answer hyperspecific questions about how much I spent on Lyft in a specific month and provide recommendations on which subscriptions delete.
I can effectively monetize my purchases by handing my data over to a company like Fetch, which will give it to advertisers who offer me better, more targeted rewards. I can connect my crypto wallet to my bank account for smoother transfers; I can use aggregators to better represent my financial history in loan applications.
Beyond that, Vanderkaap says the next evolution of U.S. open banking will be account-to-account payments. If I’m on a retailer’s website, for example, I’ll be able to pay with my bank account instead of a credit card. Companies like Airbnb and Uber already offer it through Stripe, and it’s set to expand.
Merchants like open banking because they can save money on transaction fees, but it’s also smart from a budget perspective. Vanderkaap likens this to the envelope (or cash stuffing) method.
“This is one way to do it in an e-commerce environment: You only spend the money you have,” he says. “You will not incur any late fees; you will not incur any interest. You are not accumulating debt because the funds come directly from your bank account.
The bottom line
Open banking involves using my financial data outside of the bank to manage money. With control in my hands and advances in security, open banking is a trend that is likely to become more and more popular.
“The power will be in the hands of consumers,” says Choubey. “Open banking is just the beginning and will permeate virtually every data source available to us.”
More from Money:
Dollar Scholar asks: Is my bank account number a secret?
Why it’s so satisfying to constantly check your account balance, according to a financial psychologist
I was skeptical of online banking until experts showed me their money-saving potential